Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Unless the context otherwise requires, the use of the terms "Winnebago Industries," "Winnebago," and "the Company" in these Notes to Consolidated Financial Statements refers to Winnebago Industries, Inc. and its wholly-owned subsidiaries.
Nature of Operations
Winnebago Industries, Inc. is one of the leading North American manufacturers with a diversified portfolio of recreation vehicles ("RV"s) and marine products used primarily in leisure travel and outdoor recreation activities. The Company distributes RV and marine products primarily through independent dealers throughout the U.S. and Canada, who then retail the products to the end consumer. The Company also distributes marine products internationally through independent dealers, who then retail the products to the end consumer. Other products manufactured by the Company consist primarily of original equipment manufacturing parts for other manufacturers and commercial vehicles.
Reportable Segments
The Company has two reportable segments: (1) Towable and (2) Motorhome. The Towable segment includes all products which are not motorized and are generally towed by another vehicle. The Motorhome segment includes products that include a motorized chassis as well as other related manufactured products. Certain corporate administration expenses and non-operating income and expense are recorded in a Corporate / All Other category. See Note 3, Business Segments.
Principles of Consolidation
The consolidated financial statements for Fiscal 2020 include the parent company and the Company's wholly-owned subsidiaries. All intercompany balances and transactions with our subsidiaries have been eliminated.
Fiscal Period
The Company follows a 52-/53-week fiscal year, ending the last Saturday in August. Fiscal 2020 is a 52-week year, Fiscal 2019 was a 53-week year, and 2018 was a 52-week year. The extra (53rd) week in Fiscal 2019 was recognized in our fourth quarter.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include all investments with original maturities of three months or less or which are readily convertible into known amounts of cash and are not legally restricted. The carrying amount approximates fair value due to the short maturity of the investments. Accounts at each banking institution are insured by the Federal Deposit Insurance Corporation up to $250,000, while the remaining balances are uninsured.
Derivative Instruments and Hedging Activities
The Company used derivative instruments to hedge their floating interest rate exposure. Derivative instruments were accounted for at fair value in accordance with Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging. These derivatives were designated as cash flow hedges for accounting purposes. Changes in fair value, for the effective portion of qualifying hedges, were recorded in other comprehensive income. The Company reviewed the effectiveness of the hedging instruments on a quarterly basis, recognized current year hedge ineffectiveness and the impact of the termination of the underlying instrument immediately in earnings, and discontinued hedge accounting for any hedge that was no longer considered to be highly effective. As of August 29, 2020, the Company does not have any derivative instruments or hedging activities related to interest rate risk. See Note 4 Derivatives, Investments, and Fair Value Measurements and Note 9 Long-Term Debt for additional information on the convertible debt.
Receivables
Receivables consist principally of amounts due from the Company's dealer network for RVs and boats sold.
The Company establishes allowances for doubtful accounts based on historical loss experience and any specific customer collection issues identified. Additional amounts are provided through charges to income as the Company deems necessary, after evaluation of receivables and current economic conditions. Amounts which are considered to be uncollectible are written off, and recoveries of amounts previously written off are credited to the allowance upon recovery.
Inventories
Generally, inventories are stated at the lower of cost or market, valued using the First-in, First-out basis ("FIFO"), except for the Company's Winnebago Motorhome operating segment, which is valued using the Last-in, First-out ("LIFO") basis. Manufacturing cost includes materials, labor, and manufacturing overhead. Unallocated overhead and abnormal costs are expensed as incurred.
Property and Equipment
Depreciation of property and equipment is computed using the straight-line method on the cost of the assets, less allowance for salvage value where appropriate, at rates based upon their estimated service lives as follows:
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|
|
|
|
|
Asset Class
|
Asset Life
|
Buildings
|
10-30 years
|
Machinery and equipment
|
3-15 years
|
Software
|
5-10 years
|
Transportation equipment
|
5-6 years
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill
Goodwill is tested annually in the fourth quarter of each year and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Impairment testing for goodwill is done at a reporting unit level and all goodwill is assigned to a reporting unit. The Company's reporting units are the same as the operating segments as defined in Note 3, Business Segments.
Companies have the option to first assess qualitative factors to determine whether the fair value of a reporting unit is “more likely than not” less than its carrying amount. If it is more likely than not that an impairment has occurred, companies then perform the quantitative goodwill impairment test. If the Company performs the quantitative test, the carrying value of the reporting unit is compared to an estimate of the reporting unit’s fair value to identify impairment. The estimate of the reporting unit’s fair value is determined by weighting a discounted cash flow model and a market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). In determining the estimated future cash flow, the Company considers and applies certain estimates and judgments, including current and projected future levels of income based on management plans, business trends, prospects, market and economic conditions, and market-participant considerations. If the Company fails the quantitative assessment of goodwill impairment, an impairment loss equal to the amount that a reporting unit's carrying value exceeds its fair value will be recognized.
Trade names
The Company has indefinite-lived intangible assets for trade names related to Newmar within the Motorhome segment, Grand Design within the Towable segment, and to Chris-Craft within the Corporate / All Other category. Annually in the fourth quarter, or if conditions indicate an interim review is necessary, the Company assesses qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If the Company performs a quantitative test, the relief from royalty method is used to determine the fair value of the trade name. This method uses assumptions, which require significant judgment and actual results may differ from assumed and estimated amounts. If the Company concludes that there has been impairment, the asset's carrying value will be written down to its fair value.
During the fourth quarter of Fiscal 2020, the Company completed the annual impairment tests. The Company elected to rely on a qualitative assessment for the Grand Design business, and performed the quantitative analysis for the Chris-Craft and Newmar businesses. The result of the test was that the fair value exceeded the carrying value, and no impairment was indicated.
Definite-Lived Intangible Assets and Long-Lived Assets
Long-lived assets, which include property, plant and equipment, and definite-lived intangible assets, primarily the dealer network, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable from future cash flows. The impairment test involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. In the event the carrying amount of the asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is
measured as the excess of the asset’s carrying amount over its fair value and is recognized in the statement of income in the period that the impairment occurs. The reasonableness of the useful lives of the asset and other long-lived assets is regularly evaluated.
There was no impairment loss for the year ended August 29, 2020 for definite-lived intangible assets or long-lived assets.
Self-Insurance
Generally, the Company self-insures for a portion of product liability claims, workers' compensation, and health insurance. Under these plans, liabilities are recognized for claims incurred, including those incurred but not reported. The Company uses third party administrators and actuaries using historical claims experience and various state statutes to assist in the determination of the accrued liability balance. The Company has a $50.0 million insurance policy that includes a self-insured retention for product liability of $1.0 million per occurrence and $2.0 million in aggregate per policy year. The Company's self-insured health insurance policy includes an individual retention of $0.3 million per occurrence and an aggregate retention of 125% of expected annual claims. The Company maintains excess liability insurance with outside insurance carriers to minimize the risks related to catastrophic claims in excess of self-insured positions for product liability, health insurance, and personal injury matters. Any material change in the aforementioned factors could have an adverse impact on operating results. Balances are included within Accrued expenses: Self-insurance on our Consolidated Balance Sheets.
Income Taxes
In preparing these financial statements, the Company is required to estimate the income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within the balance sheet. The Company then assesses the likelihood that the deferred tax assets will be realized based on future taxable income and, to the extent that recovery is not likely, a valuation allowance is established. To the extent the Company establishes a valuation allowance or changes this allowance in a period, an expense or a benefit is included within the tax provision in the Consolidated Statements of Income and Comprehensive Income.
Legal
Litigation expense, including estimated defense costs, is recorded when probable and reasonably estimable.
Revenue Recognition
The Company's primary source of revenue is generated through the sale of non-motorized towable units, motorized units, and marine units to the Company's independent dealer network (customers). Unit revenue is recognized at a point-in-time when the performance obligation is satisfied, which generally occurs when the unit is shipped to or picked-up from the manufacturing facilities by the customer. The Company's payment terms are typically before or on delivery, and do not include a significant financing component. The amount of consideration received and recorded to revenue varies with changes in marketing incentives and offers to customers. These marketing incentives and offers to customers are considered variable consideration. The Company adjusts the estimate of revenue at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. Refer to Note 13, Revenue Recognition, for additional information.
Advertising
Advertising costs, which consist primarily of literature and trade shows, were $12.5 million, $8.3 million, and $7.4 million in Fiscal 2020, 2019, and 2018, respectively. Advertising costs are included in Selling, general, and administrative expenses and are expensed as incurred.
Dividend
On August 19, 2020, the Board of Directors declared a quarterly cash dividend of $0.12 per share, totaling $4.0 million, paid on September 30, 2020 to common stockholders of record at the close of business on September 16, 2020.
Coronavirus (COVID-19) pandemic
The Company is closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency on March 13, 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The Company is taking advantage of the employer payroll tax (FICA) deferral offered by CARES which allows the Company to defer the payment of employer payroll taxes for the period from March 27, 2020 to December 31, 2020. The deferred FICA liability as of August 29, 2020 was $7.8 million and will be payable in equal installments at December 2021 and December 2022. Additionally, the Company is taking advantage of a tax credit granted to companies under the CARES Act who continued to pay their employees when operations were fully or partially suspended. The
refundable tax credit, reflected in cost of goods sold and within other current assets, is approximately $4.0 million and is expected to be received in Fiscal 2021.
Subsequent Events
The Company has evaluated events occurring between the end of the most recent fiscal year and the date the financial statements were issued. There were no material subsequent events except as disclosed in Note 14 Stock-Based Compensation Plans.
Recently Adopted Accounting Pronouncements
The Company adopted the Financial Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), as of September 1, 2019, using the modified retrospective basis as of the beginning of the period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed the Company to carry forward the historical lease classification, and the Company elected the hindsight practical expedient. Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of $33.8 million and $33.4 million, respectively, as of September 1, 2019. The adoption of the standard did not materially impact the Company's consolidated net earnings and had no impact on the Company's cash flows. See Note 10 Leases for more information regarding our operating and financing leases.
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|
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|
|
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(in thousands)
|
August 31, 2019
As Reported
|
|
ASU 2016-02 Adjustment on
September 1, 2019
|
|
September 1, 2019
As Adjusted
|
Assets
|
|
|
|
|
|
Other intangible assets, net
|
256,082
|
|
|
$
|
(1,310)
|
|
|
$
|
254,772
|
|
Lease assets
|
—
|
|
|
33,811
|
|
|
33,811
|
|
Total assets
|
$
|
1,104,231
|
|
|
$
|
32,501
|
|
|
$
|
1,136,732
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Accrued expenses: Other
|
$
|
13,678
|
|
|
$
|
1,258
|
|
|
$
|
14,936
|
|
Total current liabilities
|
197,744
|
|
|
1,258
|
|
|
199,002
|
|
Lease liabilities
|
—
|
|
|
31,243
|
|
|
31,243
|
|
Total non-current liabilities
|
274,275
|
|
|
31,243
|
|
|
305,518
|
|
Total liabilities and stockholders' equity
|
1,104,231
|
|
|
$
|
32,501
|
|
|
$
|
1,136,732
|
|
Also, in the first quarter of Fiscal 2020, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815), which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The adoption of this standard did not materially impact the Company's Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). ASU 2020-06 reduces the number of models used to account for convertible instruments, amends diluted EPS calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity's own shares to be classified in equity. The amendments add certain disclosure requirements to increase transparency and decision-usefulness about a convertible instrument's terms and features. Under the amendment, the Company must use the if-converted method for including convertible instruments in diluted EPS as opposed to the treasury stock method. ASU 2020-06 is effective for annual reporting periods beginning after December 15, 2021 (the Company's Fiscal 2023). Early adoption is allowed under the standard with either a modified retrospective or full retrospective method. The Company expects to adopt the new guidance in the first quarter of Fiscal 2023. While it will change the Company's diluted EPS reporting, the extent to which the standard will have a material impact on its consolidated financial statements is uncertain at this time.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020.
The Company will adopt this standard when LIBOR is discontinued, and does not expect a material impact to its consolidated financial statements.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740. The standard is effective for annual reporting periods beginning after December 15, 2020 (the Company's Fiscal 2022), including interim periods within those annual reporting periods. The Company expects to adopt the new guidance in the first quarter of Fiscal 2022, and does not expect a material impact to its consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and has since issued additional amendments. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The standard is effective for annual reporting periods beginning after December 15, 2019 (our Fiscal 2021), including interim periods within those annual reporting periods. The Company expects to adopt the new guidance in the first quarter of Fiscal 2021, and does not expect a material impact to its consolidated financial statements.
Note 2: Business Combinations
Newmar Corporation
On November 8, 2019, pursuant to the terms of the Stock Purchase Agreement dated September 15, 2019 (the "Purchase Agreement"), Winnebago completed the acquisition of 100% of Newmar Corporation, Dutch Real Estate Corp., New-Way Transport, and New-Serv (collectively “Newmar”). Newmar is a leading manufacturer of Class A and Super C motorized recreation vehicles that are sold through an established network of independent authorized dealers throughout North America.
The following table summarizes the total consideration paid for Newmar, which is subject to purchase price adjustments as stipulated in the Purchase Agreement:
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(in thousands)
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November 8, 2019
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Cash
|
$
|
264,434
|
|
Winnebago Industries shares: 2,000,000 at $46.29
|
92,572
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|
Total
|
$
|
357,006
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|
The cash portion of the purchase price of the acquisition and certain transaction expenses were funded through the private placement of convertible senior notes (as further described in Note 9, Long-Term Debt) and cash on hand. The stock consideration was discounted by 7.0% due to lack of marketability because of the one year lock-up restrictions.
The total purchase price was allocated to the net tangible and intangible assets of Newmar acquired, based on their fair values at the date of the acquisition. During the third quarter of Fiscal 2020, the Company finalized the valuation and completed the purchase price allocation, which included purchase price adjustments of $3.3 million. The following table summarizes the final fair values assigned to the Newmar net assets acquired and the determination of net assets:
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(in thousands)
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November 8, 2019
|
Cash
|
$
|
3,469
|
|
Accounts receivable
|
37,147
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|
Inventories
|
82,621
|
|
Prepaid expenses and other assets
|
9,830
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|
Property, plant, and equipment
|
31,143
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|
Goodwill
|
73,127
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|
Other intangible assets
|
172,100
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|
Total assets acquired
|
409,437
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|
Accounts payable
|
14,023
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|
Accrued compensation
|
4,306
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|
Product warranties
|
15,147
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Promotional
|
6,351
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Other
|
11,636
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|
Deferred tax liabilities
|
968
|
|
Total liabilities assumed
|
52,431
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|
Total purchase price
|
$
|
357,006
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|
The goodwill, recognized in the Company's Motorhome segment, is primarily attributable to the value of the workforce, reputation of founders, customer and dealer growth opportunities, and expected synergies. Key areas of cost synergies include increased purchasing power for raw materials and supply chain consolidation. Goodwill is expected to be mostly deductible for tax purposes.
The following table summarizes the other intangible assets acquired:
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|
|
|
|
|
|
|
|
|
(in thousands)
|
November 8, 2019
|
|
Useful Life-Years
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Trade name
|
98,000
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|
|
Indefinite
|
Dealer network
|
64,000
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|
|
12.0
|
Backlog
|
8,800
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|
|
0.5
|
Non-compete agreements
|
1,300
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|
|
5.0
|
The fair value of the trade name and dealer network were estimated using an income approach. Under the income approach, an intangible asset's fair value is equal to the present value of the future economic benefits to be derived from ownership of the asset. The fair value of the trade name was estimated using an income approach, specifically the relief from royalty method. The relief from royalty method is based on the hypothetical royalty stream that would be received if the Company were to license the trade name and was based on expected revenues. The fair value of the trade name was estimated using an income approach, specifically the cost to recreate/cost saving method. This method uses the replacement of the asset as an indicator of the fair value of the asset. The useful life of the intangibles was determined considering the expected cash flows used to measure the fair value of the intangible assets adjusted for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets. On the acquisition date, amortizable intangible assets had a weighted-average useful life of approximately 10.5 years.
The results of Newmar's operations have been included in the Company's Consolidated Financial Statements from the close of the acquisition within the Motorhome segment. The following table provides net revenues and operating income from the Newmar operating segment included in the Company's consolidated results following the November 8, 2019 closing date:
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|
|
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|
(in thousands, except per share data)
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2020
|
Net revenues
|
$
|
388,383
|
|
Net income (loss)
|
(3,642)
|
|
The following unaudited pro forma information represents the Company's results of operations as if the Fiscal 2020 acquisition of Newmar had occurred at the beginning of Fiscal 2019:
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|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
2020
|
|
2019
|
Net revenues
|
$
|
2,508,792
|
|
|
$
|
2,645,914
|
|
Net (loss) income
|
72,609
|
|
|
101,692
|
|
Income per share - basic
|
$
|
2.16
|
|
|
$
|
3.03
|
|
Income per share - diluted
|
$
|
2.11
|
|
|
$
|
3.02
|
|
The unaudited pro forma data above includes the following significant non-recurring adjustments made to account for certain costs which would have changed if the acquisition of Newmar had occurred at the beginning of Fiscal 2019:
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|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
Amortization of intangibles (1 year or less useful life)(1)
|
$
|
13,610
|
|
|
$
|
(13,610)
|
|
Increase in amortization of intangibles(2)
|
(1,061)
|
|
|
(5,578)
|
|
Expenses related to business combination (transaction costs)(3)
|
9,761
|
|
|
(9,950)
|
|
Interest to reflect new debt structure(4)
|
(4,356)
|
|
|
(19,155)
|
|
Taxes related to the adjustments to the pro forma data and to the income of Newmar(5)
|
(2,968)
|
|
|
2,686
|
|
(1) Includes amortization adjustments for the backlog intangible asset and the fair-value inventory adjustment.
(2) Includes amortization adjustments for the dealer network and non-compete intangible assets.
(3) Pro forma transaction costs include $0.6 million incurred prior to the acquisition.
(4) Includes adjustments for cash and non-cash interest expense as well as deferred financing costs. Refer to Note 9, Long-Term Debt, for additional information on the Company's new debt structure as a result of the acquisition.
(5) Calculated using the Company's U.S. federal statutory rate of 21.0%.
The unaudited pro forma information is not necessarily indicative of the results that the Company would have achieved had the transaction actually taken place at the beginning of Fiscal 2019, and the unaudited pro forma information does not purport to be indicative of future financial operating results. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.
Transaction costs related to the Newmar acquisition were $10.4 million, of which $9.8 million were expensed during Fiscal 2020 and $0.6 million were expensed during the fourth quarter of Fiscal 2019. Transaction costs are included in Selling, general, and administrative expenses in the accompanying Consolidated Statements of Income and Comprehensive Income.
Chris-Craft USA, Inc.
On June 4, 2018, the Company acquired 100% of the ownership interest of Chris-Craft USA, Inc. ("Chris-Craft"). The acquisition diversifies the Company's outdoor lifestyle value proposition into the recreational powerboat industry. The assets, liabilities, and operating results have been included in the financial statements from the date of acquisition within the Corporate / All Other category. Pro forma results of operations for this acquisition have not been presented, as it was immaterial to the reported results. The purchase price allocation was finalized during the fourth quarter of Fiscal 2019.
Note 3: Business Segments
The Company has identified six operating segments: 1) Grand Design towables, 2) Winnebago towables, 3) Winnebago motorhomes, 4) Newmar motorhomes, 5) Chris-Craft marine, and 6) Winnebago specialty vehicles. The Company evaluates performance based on each operating segment's Adjusted EBITDA, as defined below, which excludes certain corporate administration expenses and non-operating income and expense.
The Company's two reportable segments include: 1) Towable (comprised of products which are not motorized and are generally towed by another vehicle as well as other related manufactured products and services), which is an aggregation of the Winnebago towables and Grand Design towables operating segments and 2) Motorhome (comprised of products that include a motorized
chassis as well as other related manufactured products and services), which is an aggregation of the Winnebago motorhomes and Newmar motorhomes operating segments.
The Corporate / All Other category includes the Chris-Craft marine and Winnebago specialty vehicles operating segments as well as expenses related to certain corporate administration expenses for the oversight of the enterprise. These expenses include items such as corporate leadership and administration costs.
Identifiable assets of the reportable segments exclude general corporate assets, which principally consist of cash and cash equivalents and certain deferred tax balances. The general corporate assets are included in the Corporate / All Other category.
The Company's chief operating decision maker ("CODM") is the Chief Executive Officer. The CODM relies on internal management reporting that analyzes consolidated results to the net earnings level and operating segment's Adjusted EBITDA. The CODM has ultimate responsibility for enterprise decisions. The CODM determines, in particular, resource allocation for, and monitors the performance of, the consolidated enterprise, the Towable segment, and the Motorhome segment. The Towable segment management and Motorhome segment management have responsibility for operating decisions, allocating resources, and assessing performance within their respective segments. The accounting policies of both reportable segments are the same and are described in Note 1, Summary of Significant Accounting Policies.
The Company evaluates the performance of the reportable segments based on Adjusted EBITDA. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization expense, and other adjustments made in order to present comparable results from year to year. Examples of items excluded from Adjusted EBITDA include acquisition-related fair-value inventory step-up, acquisition-related costs, restructuring expenses, and non-operating income.
The following table shows information by reportable segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Net Revenues
|
|
|
|
|
|
Towable
|
$
|
1,227,567
|
|
|
$
|
1,197,327
|
|
|
$
|
1,127,723
|
|
Motorhome
|
1,056,794
|
|
|
706,927
|
|
|
860,675
|
|
Corporate / All Other
|
71,172
|
|
|
81,420
|
|
|
28,431
|
|
Consolidated
|
$
|
2,355,533
|
|
|
$
|
1,985,674
|
|
|
$
|
2,016,829
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
Towable
|
$
|
148,276
|
|
|
$
|
163,677
|
|
|
$
|
157,010
|
|
Motorhome
|
32,949
|
|
|
27,455
|
|
|
35,508
|
|
Corporate / All Other
|
(13,150)
|
|
|
(11,480)
|
|
|
(10,772)
|
|
Consolidated
|
$
|
168,075
|
|
|
$
|
179,652
|
|
|
$
|
181,746
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
Towable
|
$
|
13,389
|
|
|
$
|
27,679
|
|
|
$
|
18,460
|
|
Motorhome
|
15,061
|
|
|
9,969
|
|
|
9,302
|
|
Corporate / All Other
|
3,927
|
|
|
3,210
|
|
|
906
|
|
Consolidated
|
$
|
32,377
|
|
|
$
|
40,858
|
|
|
$
|
28,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Total Assets
|
|
|
|
Towable
|
$
|
718,253
|
|
|
$
|
628,994
|
|
Motorhome
|
600,304
|
|
|
332,157
|
|
Corporate / All Other
|
395,143
|
|
|
143,080
|
|
Consolidated
|
$
|
1,713,700
|
|
|
$
|
1,104,231
|
|
The following table reconciles net income to consolidated Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Net income
|
$
|
61,442
|
|
|
$
|
111,798
|
|
|
$
|
102,357
|
|
Interest expense
|
37,461
|
|
|
17,939
|
|
|
18,246
|
|
Provision for income taxes
|
15,834
|
|
|
27,111
|
|
|
40,283
|
|
Depreciation
|
15,997
|
|
|
13,682
|
|
|
9,849
|
|
Amortization of intangible assets
|
22,104
|
|
|
9,635
|
|
|
9,328
|
|
EBITDA
|
152,838
|
|
|
180,165
|
|
|
180,063
|
|
Acquisition-related fair-value inventory step-up
|
4,810
|
|
|
—
|
|
|
—
|
|
Acquisition-related costs
|
9,761
|
|
|
—
|
|
|
2,177
|
|
Restructuring(1)
|
1,640
|
|
|
1,068
|
|
|
—
|
|
Non-operating income
|
(974)
|
|
|
(1,581)
|
|
|
(494)
|
|
Adjusted EBITDA
|
$
|
168,075
|
|
|
$
|
179,652
|
|
|
$
|
181,746
|
|
(1) Balance excludes depreciation expense classified as restructuring as the balance is already included in the EBITDA calculation.
The following table reconciles net revenues by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
2,225,028
|
|
|
$
|
1,836,472
|
|
|
$
|
1,860,613
|
|
International
|
130,505
|
|
|
149,202
|
|
|
156,216
|
|
Net Revenues
|
$
|
2,355,533
|
|
|
$
|
1,985,674
|
|
|
$
|
2,016,829
|
|
Note 4: Derivatives, Investments, and Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company accounts for fair value measurements in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement, and expands disclosure about fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1 - Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 - Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets in nonactive markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at August 29, 2020 and August 31, 2019 according to the valuation techniques that was used to determine their fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Hierarchy
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets that fund deferred compensation:
|
|
|
|
|
|
|
|
Domestic equity funds
|
$
|
626
|
|
|
$
|
626
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International equity funds
|
34
|
|
|
34
|
|
|
—
|
|
|
—
|
|
Fixed income funds
|
50
|
|
|
50
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
$
|
710
|
|
|
$
|
710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Hierarchy
|
|
|
|
|
(in thousands)
|
August 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets that fund deferred compensation:
|
|
|
|
|
|
|
|
Domestic equity funds
|
$
|
373
|
|
|
$
|
288
|
|
|
$
|
85
|
|
|
$
|
—
|
|
International equity funds
|
101
|
|
|
45
|
|
|
56
|
|
|
—
|
|
Fixed income funds
|
155
|
|
|
54
|
|
|
101
|
|
|
—
|
|
Interest rate swap contract
|
90
|
|
|
—
|
|
|
90
|
|
|
—
|
|
Total assets at fair value
|
$
|
719
|
|
|
$
|
387
|
|
|
$
|
332
|
|
|
$
|
—
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Assets that fund deferred compensation
The Company's assets that fund deferred compensation are marketable equity securities measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. These securities are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan and the Executive Deferred Compensation Plan. Refer to Note 11, Employee and Retiree Benefits.
The proportion of the assets that will fund options which expire within a year are included in Prepaid expenses and other assets on the Consolidated Balance Sheets. The remaining assets are classified as non-current and are included in Other assets.
Interest Rate Swap Contract
On March 6, 2020, the Company entered into an interest rate swap agreement for an incremental notional amount of $25 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception, was effective March 10, 2020 and had been designated as a cash flow hedge. The interest rate swap agreement, with a maturity date of March 4, 2025, converted the Company's interest rate payments on $25 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate of 1.265%. In the fourth quarter of Fiscal 2020, the Company exited the swap contract prior to its expiration on March 4, 2025.
On March 2, 2020, the Company entered into an interest rate swap agreement for an incremental notional amount of $25 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception, was effective March 4, 2020 and had been designated as a cash flow hedge. The interest rate swap agreement, with a maturity date of March 4, 2025, converted the Company's interest rate payments on $25 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate of 1.364%. In the fourth quarter of Fiscal 2020, the Company exited the swap contract prior to its expiration on March 4, 2025.
On January 23, 2017, the Company entered into an interest swap contract, which effectively fixed the interest rate on the $300 million loan agreement ("Term Loan") for a notional amount that reduced each December during the swap contract. As of August 29, 2020, the remaining payments of the Term Loan were paid in full using the proceeds from the Company's senior secured notes offering. In the first quarter of Fiscal 2020, the Company exited the swap contract prior to its expiration on December 8, 2020.
Assets and Liabilities that are measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets, which includes goodwill, intangible assets, and property, plant, and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, the Company must evaluate the non-financial asset for impairment. If an impairment occurs, the asset is required to be recorded at the estimated fair value. No impairments were recorded for non-financial assets in Fiscal 2020, 2019, and 2018.
Fair Value of Financial Instruments
The Company's financial instruments, other than those presented in the disclosures above, include cash, receivables, accounts payable, other payables, and long-term debt. The fair values of cash, receivables, accounts payable, and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. See Note 9, Long-Term Debt, for information about the fair value of the Company's long-term debt.
Note 5: Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Finished goods
|
$
|
17,141
|
|
|
$
|
53,417
|
|
Work-in-process ("WIP")
|
86,651
|
|
|
82,926
|
|
Raw materials
|
114,982
|
|
|
105,804
|
|
Total
|
218,774
|
|
|
242,147
|
|
Less LIFO reserve
|
35,833
|
|
|
41,021
|
|
Inventories
|
$
|
182,941
|
|
|
$
|
201,126
|
|
Inventory valuation methods consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
LIFO basis
|
$
|
88,675
|
|
|
$
|
184,007
|
|
FIFO basis
|
130,099
|
|
|
58,140
|
|
Total
|
$
|
218,774
|
|
|
$
|
242,147
|
|
The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates.
Our inventory quantities were reduced during Fiscal 2020, resulting in a liquidation of LIFO inventory layers (a "LIFO decrement"). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that
have decrements. The Company had a decrement of its LIFO inventory layers of $5.2 million in Fiscal 2020. There was no LIFO decrement recorded in Fiscal 2019.
Note 6: Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, net of accumulated depreciation and consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Land
|
$
|
11,101
|
|
|
$
|
6,799
|
|
Buildings and building improvements
|
165,343
|
|
|
119,638
|
|
Machinery and equipment
|
117,370
|
|
|
107,701
|
|
Software
|
28,456
|
|
|
29,169
|
|
Transportation
|
4,913
|
|
|
3,865
|
|
Property, plant, and equipment, gross
|
327,183
|
|
|
267,172
|
|
Less accumulated depreciation
|
152,238
|
|
|
139,600
|
|
Property, plant, and equipment, net
|
$
|
174,945
|
|
|
$
|
127,572
|
|
For Fiscal 2020, 2019, and 2018, depreciation charged to operations was $16.0 million, $13.7 million, and $9.8 million, respectively.
Note 7: Goodwill and Intangible Assets
The changes in carrying amount of goodwill by segment were as follows in Fiscal 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Towable
|
|
Motorhome
|
|
Corporate / All Other
|
|
Total
|
Balances at August 26, 2017
|
$
|
242,728
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
242,728
|
|
Grand Design purchase price adjustment
|
1,956
|
|
|
—
|
|
|
—
|
|
|
1,956
|
|
Acquisition of Chris-Craft(1)
|
—
|
|
|
—
|
|
|
29,686
|
|
|
29,686
|
|
Balances at August 25, 2018
|
$
|
244,684
|
|
|
$
|
—
|
|
|
$
|
29,686
|
|
|
$
|
274,370
|
|
Chris-Craft purchase price adjustment(1)
|
—
|
|
|
—
|
|
|
561
|
|
|
561
|
|
Balances at August 31, 2019
|
$
|
244,684
|
|
|
$
|
—
|
|
|
$
|
30,247
|
|
|
$
|
274,931
|
|
Acquisition of Newmar(1)
|
—
|
|
|
73,127
|
|
|
—
|
|
|
73,127
|
|
Balances at August 29, 2020
|
$
|
244,684
|
|
|
$
|
73,127
|
|
|
$
|
30,247
|
|
|
$
|
348,058
|
|
(1) Refer to Note 2, Business Combinations, for additional information on the acquisitions of Chris-Craft and Newmar.
The valuation used to test goodwill for impairment is dependent upon a number of significant estimates and assumptions, including macroeconomic conditions, growth rates, competitive activities, cost containment, margin expansion and the Company's business plans. The Company believes these estimates and assumptions are reasonable. However, future changes in the judgments, assumptions and estimates that are used in our impairment testing for goodwill, including discount and tax rates or future cash flow projections, could result in significantly different estimates of the fair values.
The Company has no accumulated impairment losses as of August 29, 2020. While the Chris-Craft reporting unit's fair value exceeded its respective carrying value, the fair value cushion was not substantial and could be impacted if projected operating results are not met or other significant assumptions referenced above change.
Intangible assets, net of accumulated amortization consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 29, 2020
|
|
|
|
|
|
August 31, 2019
|
|
|
|
|
(in thousands)
|
Weighted Average Life-Years
|
|
Cost
|
|
Accumulated Amortization
|
|
Weighted Average Life-Years
|
|
Cost
|
|
Accumulated Amortization
|
Trade names
|
Indefinite
|
|
$
|
275,250
|
|
|
|
|
Indefinite
|
|
$
|
177,250
|
|
|
|
Dealer networks
|
12.2
|
|
159,581
|
|
|
$
|
32,487
|
|
|
12.2
|
|
95,581
|
|
|
$
|
20,329
|
|
Backlog
|
0.5
|
|
28,327
|
|
|
28,327
|
|
|
0.5
|
|
19,527
|
|
|
19,527
|
|
Non-compete agreements
|
4.1
|
|
6,647
|
|
|
4,223
|
|
|
4.1
|
|
5,347
|
|
|
3,077
|
|
Leasehold interest-favorable
|
0
|
|
—
|
|
|
—
|
|
|
8.1
|
|
2,000
|
|
|
690
|
|
Other intangible assets, gross
|
|
|
469,805
|
|
|
65,037
|
|
|
|
|
299,705
|
|
|
43,623
|
|
Less accumulated amortization
|
|
|
65,037
|
|
|
|
|
|
|
43,623
|
|
|
|
Other intangible assets, net
|
|
|
$
|
404,768
|
|
|
|
|
|
|
$
|
256,082
|
|
|
|
The weighted average remaining amortization period for intangible assets as of August 29, 2020 was approximately ten years.
Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
Fiscal 2021
|
$
|
14,361
|
|
Fiscal 2022
|
13,719
|
|
Fiscal 2023
|
13,526
|
|
Fiscal 2024
|
13,424
|
|
Fiscal 2025
|
13,219
|
|
Thereafter
|
61,269
|
|
Total amortization expense remaining
|
$
|
129,518
|
|
Note 8: Product Warranties
The Company provides certain service and warranty on products sold. From time to time, the Company also voluntarily incurs costs for certain warranty-type expenses occurring after the normal warranty period to help protect the reputation of the Company's products and the goodwill of the customers. Estimated costs related to product warranty are accrued at the time of sale and are based upon historical warranty and service claims experience. Adjustments are made to accruals as claim data and cost experience becomes available.
In addition to the costs associated with the contractual warranty coverage provided on the Company's products, costs are incurred occasionally as a result of additional service actions not covered by warranties, including product recalls and customer satisfaction actions. Although the Company estimates and reserves for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
Changes in the Company's product warranty liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
44,436
|
|
|
$
|
40,498
|
|
|
$
|
30,805
|
|
Business acquisitions(1)
|
15,147
|
|
|
—
|
|
|
611
|
|
Provision
|
61,898
|
|
|
45,902
|
|
|
42,377
|
|
Claims paid
|
(57,450)
|
|
|
(41,964)
|
|
|
(33,295)
|
|
Balance at end of year
|
$
|
64,031
|
|
|
$
|
44,436
|
|
|
$
|
40,498
|
|
(1) Refer to Note 2, Business Combinations, for additional information on the acquisitions of Chris-Craft and Newmar.
Note 9: Long-Term Debt
On July 8, 2020, the Company closed its private offering (the “Senior Secured Notes Offering”) of $300 million aggregate principal amount of 6.25% Senior Secured Notes due 2028 (the “Senior Secured Notes”). The Senior Secured Notes were issued in accordance with an Indenture dated as of July 8, 2020 (the “Indenture”). The Senior Secured Notes will mature on July 15, 2028 unless earlier redeemed or repurchased. Interest on the Senior Secured Notes accrues starting July 8, 2020 and is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 15, 2021. The Senior Secured Notes and the related guarantees are secured by (i) a first-priority lien on substantially all of the Company’s and the subsidiary guarantor parties existing and future assets (other than certain collateral under the Company’s ABL facility) and (ii) a second-priority lien on the Company’s present and future accounts and receivables, inventory and other related assets and proceeds that secure the ABL facility on a first-priority basis.
The Indenture limits certain abilities of the Company and its subsidiaries (subject to certain exceptions and qualifications) to incur additional debt and provide additional guarantees; make restricted payments; create or permit certain liens; make certain asset sales; use the proceeds from the sale of assets and subsidiary stock; create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other inter-company distributions; engage in certain transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; and consolidate, merge or transfer all or substantially all of the Company’s assets and the assets of its restricted subsidiaries.
The Company amortizes debt issuance costs on a straight-line basis over the term of the associated debt agreement. If early principal payments are made on the Senior Secured Notes, a proportional amount of the unamortized issuance costs is expensed. As part of the Senior Secured Notes Offering, the Company capitalized $7.3 million in debt issuance costs that will be amortized over the eight-year term of the agreement.
On November 8, 2016, the Company entered into an asset-based revolving credit agreement ("ABL") and a loan agreement ("Term Loan") with JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent and certain lenders from time to time party thereto. The remaining principal balance of the Term Loan as of July 8, 2020 was $249.8 million, which was repaid with the proceeds from the Senior Secured Notes, and debt issuance costs of $4.7 million were written off upon repayment. In addition, the interest rate swaps with a liability position of $0.6 million hedging the Term Loan interest rates were settled early in July 2020.
Under the ABL, the Company has a $192.5 million credit facility that matures on October 22, 2024 (subject to certain factors which may accelerate the maturity date) on a revolving basis, subject to availability under a borrowing base consisting of eligible accounts receivable and eligible inventory. The ABL is available for issuance of letters of credit to a specified limit of $19.3 million. The Company pays a commitment fee of 0.25% on the average daily amount of the facility available, but unused. The Company can elect to base the interest rate on various rates plus specific spreads depending on the amount of borrowings outstanding. If drawn, the Company would pay interest on ABL borrowings at a floating rate based upon LIBOR plus a spread of between 1.25% and 1.75%, depending on the usage of the facility during the most recent quarter. Based on current usage, the Company would pay LIBOR plus 1.25%.
Convertible Notes
On November 1, 2019, the Company issued $300.0 million in aggregate principal amount of 1.5% unsecured convertible senior notes due 2025 (the “Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting the initial purchasers' transaction fees and offering expense payable by the Company, were approximately $290.2 million. The Convertible Notes bear interest at the annual rate of 1.5%, payable on April 1 and October 1 of each year, beginning on April 1, 2020, and will mature on April 1, 2025, unless earlier converted or repurchased by the Company.
The Convertible Notes are convertible into cash, shares of the Company's common stock or a combination thereof, at the election of the Company, at an initial conversion rate of 15.6906 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $63.73 per share, as may be adjusted pursuant to the terms of the indenture governing the Convertible Notes (the "Convertible Notes Indenture"). The Convertible Notes may be converted at any time on or after October 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date.
The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the Convertible Notes Indenture. It is the Company's current intent to settle all conversions of the Convertible Notes through settlement of cash.
Prior to the close of business on the business day immediately preceding October 1, 2024, the Convertible Notes will be convertible only under the following circumstances:
(1) during any calendar quarter commencing after December 31, 2019 if the closing sale price of the common stock is more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2) during the five consecutive business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate for the Convertible Notes on each such trading day; or
(3) upon the occurrence of certain specified corporate events set forth in the Convertible Notes Indenture.
The Company may not redeem the Convertible Notes at our option prior to the maturity date, and no sinking fund is provided for the Convertible Notes.
On October 29, 2019 and October 30, 2019, in connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, the number of shares of the Company's common stock that initially underlie the Convertible Notes, and are expected generally to reduce the potential dilution and/or offset any cash payments the Company is required to make in excess of the principal amount due, as the case may be, upon conversion of the Convertible Notes in the event that the market price of the Company's common stock is greater than the strike price of the Hedge Transactions, which was initially $63.73 per share (subject to adjustment under the terms of the Hedge Transactions), corresponding to the initial conversion price of the Convertible Notes.
On October 29, 2019 and October 30, 2019, the Company also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby the Company sold warrants at a higher strike price relating to the same number of shares of the Company's common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments. The initial strike price of the warrants is $96.20 per share (subject to adjustment under the terms of the Warrant Transactions), which is 100% above the last reported sale price of the Company's common stock on October 29, 2019. The Warrant Transactions could have a dilutive effect to the Company's stockholders to the extent that the market price per share of the Company's common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
The Company used $28.6 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the Call Spread Transactions.
The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Call Spread Transactions.
Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions
The Call Spread Transactions were classified as equity. The Company bifurcated the proceeds from the offering of the Convertible Notes between liability and equity components. On the date of issuance, the liability and equity components were calculated to be approximately $215.0 million and $85.0 million, respectively. The initial $215.0 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 8.0%. The initial $85.0 million ($64.1 million net of tax) equity component represents the difference between the fair value of the initial $215.0 million in debt and the $300.0 million of gross proceeds. The related initial debt discount of $85.0 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method.
In connection with the above-noted transactions, the Company incurred approximately $9.8 million of offering-related costs. These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. The Company allocated $7.0 million of debt issuance costs to the liability component, which were capitalized as deferred financing costs within Long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method. The remaining $2.8 million of transaction costs allocated to the equity component were recorded as a reduction of the equity component.
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
ABL
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan
|
—
|
|
|
260,000
|
|
Senior Secured Notes
|
300,000
|
|
|
—
|
|
Convertible Notes
|
300,000
|
|
|
—
|
|
Long-term debt, excluding debt issuance costs
|
600,000
|
|
|
260,000
|
|
Convertible Notes unamortized interest discount
|
(74,294)
|
|
|
—
|
|
Debt issuance cost, net
|
(13,076)
|
|
|
(5,706)
|
|
Long-term debt
|
512,630
|
|
|
254,294
|
|
Less current maturities
|
—
|
|
|
8,892
|
|
Long-term debt, less current maturities
|
$
|
512,630
|
|
|
$
|
245,402
|
|
As of August 29, 2020, the fair value of long-term debt, excluding debt issuance costs, was $674.7 million. As of August 31, 2019, the fair value of long-term debt, excluding debt issuance costs, was $255.8 million.
Aggregate contractual maturities of debt in future fiscal years, are as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
Fiscal 2021
|
$
|
—
|
|
Fiscal 2022
|
—
|
|
Fiscal 2023
|
—
|
|
Fiscal 2024
|
—
|
|
Fiscal 2025
|
300,000
|
|
Thereafter
|
300,000
|
|
Total Long-term debt
|
$
|
600,000
|
|
Note 10: Leases
The Company's leases primarily include operating leases for office and manufacturing space and equipment. The Company's finance leases are primarily for real estate. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. The Company has lease agreements that contain both lease and non-lease components, and has elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. When the terms of multiple lease agreements are materially consistent, the Company has elected the portfolio approach for our asset and liability calculations.
Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. The Company generally uses a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. The assumed lease terms of the Company generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.
Some of the Company's real estate operating leases require payment of real estate taxes, common area maintenance, and insurance. In addition, certain of the leases are subject to annual changes in the consumer price index. These components comprise the majority of the Company's variable lease cost and are excluded from the present value of the lease obligations. Fixed payments may contain predetermined fixed rent escalations. For operating leases, the Company recognizes the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
The following table details the supplemental balance sheet information related to the Company's leases:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Classification
|
August 29, 2020
|
Assets
|
|
|
Operating leases
|
Operating lease assets
|
$
|
29,463
|
|
Finance leases
|
Other assets
|
$
|
4,398
|
|
Total lease assets
|
|
$
|
33,861
|
|
|
|
|
Liabilities
|
|
|
Current: Operating leases
|
Accrued expenses: Other
|
$
|
2,660
|
|
Current: Finance leases
|
Accrued expenses: Other
|
539
|
|
Non-Current: Operating leases
|
Operating lease liabilities
|
27,048
|
|
Non-Current: Finance leases
|
Non-current liabilities: Other
|
$
|
4,868
|
|
Total lease liabilities
|
|
$
|
35,115
|
|
The following table details the operating lease cost incurred:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
(in thousands)
|
Classification
|
August 29, 2020
|
Operating lease expense(1)
|
Costs of goods sold and SG&A
|
$
|
6,962
|
|
Finance lease cost:
|
|
|
Depreciation of lease assets
|
Costs of goods sold and SG&A
|
474
|
|
Interest on lease liabilities
|
Interest expense
|
289
|
|
Total lease cost
|
|
$
|
7,725
|
|
(1) Operating lease expense includes short-term leases and variable lease payments, which are immaterial.
The Company's future lease commitments for future fiscal years as of August 29, 2020 included the following related party and non-related party leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases as of August 29, 2020
|
|
|
Financing Leases
|
|
|
|
|
(in thousands)
|
Related Party Amount
|
Non-Related Party Amount
|
Total
|
Non-Related Party Amount
|
|
|
|
|
Fiscal 2021
|
$
|
900
|
|
$
|
3,503
|
|
$
|
4,403
|
|
$
|
855
|
|
|
|
|
|
Fiscal 2022
|
900
|
|
3,188
|
|
4,088
|
|
851
|
|
|
|
|
|
Fiscal 2023
|
1,500
|
|
2,897
|
|
4,397
|
|
842
|
|
|
|
|
|
Fiscal 2024
|
1,800
|
|
2,587
|
|
4,387
|
|
846
|
|
|
|
|
|
Fiscal 2025
|
1,800
|
|
2,393
|
|
4,193
|
|
867
|
|
|
|
|
|
Thereafter
|
7,800
|
|
9,518
|
|
17,318
|
|
2,575
|
|
|
|
|
|
Total future undiscounted lease payments
|
14,700
|
|
24,086
|
|
38,786
|
|
6,836
|
|
|
|
|
|
Less: Interest
|
3,874
|
|
5,204
|
|
9,078
|
|
1,429
|
|
|
|
|
|
Total reported lease liabilities
|
$
|
10,826
|
|
$
|
18,882
|
|
$
|
29,708
|
|
$
|
5,407
|
|
|
|
|
|
The Company's future minimum lease payments for future fiscal years as determined prior to the adoption of ASC 842, Leases, and as disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2019, included the following related party and non-related party leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases as of August 31, 2019
|
|
|
(in thousands)
|
Related Party Amount
|
Non-Related Party Amount
|
Total
|
Fiscal 2020
|
$
|
2,864
|
|
$
|
1,236
|
|
$
|
4,100
|
|
Fiscal 2021
|
2,863
|
|
1,068
|
|
3,931
|
|
Fiscal 2022
|
2,863
|
|
759
|
|
3,622
|
|
Fiscal 2023
|
3,597
|
|
530
|
|
4,127
|
|
Fiscal 2024
|
3,963
|
|
361
|
|
4,324
|
|
Thereafter
|
25,064
|
|
1,359
|
|
26,423
|
|
Total future lease commitments
|
$
|
41,214
|
|
$
|
5,313
|
|
$
|
46,527
|
|
The following table details additional information related to the Company's leases:
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Operating cash flows from operating leases
|
$
|
2,463
|
|
Operating cash flows from financing leases
|
289
|
|
Financing cash flows from financing leases
|
362
|
|
Lease assets obtained in exchange for new lease liabilities:
|
|
Operating leases
|
1,179
|
|
Finance leases (1)
|
5,664
|
|
|
|
|
August 29, 2020
|
Weighted average remaining lease term:
|
|
Operating leases
|
8.7
|
Finance leases
|
7.8
|
Weighted average discount rate:
|
|
Operating leases
|
6.2
|
%
|
Finance leases
|
6.2
|
%
|
(1) Represents the lease liability added. Lease assets are offset by a $1.0 million unfavorable lease liability created by the acquisition of Newmar.
Note 11: Employee and Retiree Benefits
Deferred compensation benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Non-qualified deferred compensation
|
$
|
11,460
|
|
|
$
|
13,093
|
|
Supplemental executive retirement plan
|
1,838
|
|
|
2,072
|
|
Executive share option plan
|
—
|
|
|
12
|
|
Executive deferred compensation plan
|
710
|
|
|
621
|
|
Total deferred compensation benefits
|
14,008
|
|
|
15,798
|
|
Less current portion(1)
|
2,878
|
|
|
2,920
|
|
Deferred compensation benefits, net of current portion
|
$
|
11,130
|
|
|
$
|
12,878
|
|
(1) Included in accrued compensation in the consolidated balance sheets.
Deferred Compensation Benefits
Non-Qualified Deferred Compensation
The Company has a Non-Qualified Deferred Compensation Program which permitted key employees to annually elect to defer a portion of their compensation until their retirement. The plan has been closed to any additional deferrals since January 2001. The retirement benefit to be provided is based upon the amount of compensation deferred and the age of the individual at the time of the contracted deferral. An individual generally vests at age 55 and 5 years of participation under the plan. For deferrals prior to December 1992, vesting occurs at the later of age 55 and 5 years of service from first deferral or 20 years of service. Deferred compensation expense was $0.9 million, $0.9 million, and $1.1 million in Fiscal 2020, 2019, and 2018, respectively.
Supplemental Executive Retirement Plan ("SERP")
The primary purpose of this plan was to provide the Company's officers and managers with supplemental retirement income for a period of 15 years after retirement. The Company has not offered this plan on a continuing basis to members of management since 1998. The plan was funded with individual whole life insurance policies (split dollar program) owned by the named insured officer or manager. The Company initially paid the life insurance premiums on the life of the individual, and the individual would receive life insurance and supplemental cash payments during the 15 years following retirement. In October 2008, the plan was amended as a result of changes in the tax and accounting regulations and rising administrative costs. Under the redesigned SERP, the underlying life insurance policies previously owned by the insured individual became company-owned life insurance ("COLI") by a release of all interests by the participant and assignment to Winnebago Industries as a prerequisite to participate in the SERP and transition from the Split Dollar Program. This program remains closed to new employee participation.
To assist in funding the deferred compensation and SERP liabilities, the Company has invested in COLI policies. The cash surrender value of these policies is presented in investment in life insurance in the accompanying balance sheets and consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Cash value
|
$
|
64,214
|
|
|
$
|
61,836
|
|
Borrowings
|
(36,376)
|
|
|
(34,990)
|
|
Investment in life insurance
|
$
|
27,838
|
|
|
$
|
26,846
|
|
Executive Deferred Compensation Plan
In December 2006, the Company adopted the Winnebago Industries, Inc. Executive Deferred Compensation Plan (the "Executive Deferred Compensation Plan"). Under the Executive Deferred Compensation Plan, corporate officers and certain key employees may annually choose to defer up to 50% of their salary and up to 100% of their cash incentive awards. The assets are presented as other assets in the accompanying balance sheets. Such assets on August 29, 2020 and August 31, 2019 were $0.7 million and $0.6 million, respectively.
Profit Sharing Plan
The Company has a qualified profit sharing and contributory 401(k) plan for eligible employees. The plan provides matching contributions made by Winnebago Industries and discretionary contributions as approved by the Board of Directors. Matching contributions to the plan for Fiscal 2020, 2019, and 2018 were $3.4 million, $2.9 million, and $2.3 million, respectively. No discretionary contributions were approved for the years presented.
Note 12: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV, motorhome, and boat industries enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers are financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the units purchased.
The Company's repurchase agreements generally provide that, in the event of default by the dealer on the agreement to pay the lending institution, Winnebago Industries will repurchase the financed merchandise. The terms of these agreements, which generally can last up to 24 months, provide that the Company's liability will be the lesser of remaining principal owed by the dealer to the lending institution, or dealer invoice less periodic reductions based on the time since the date of the original invoice. The Company's liability cannot exceed 100% of the dealer invoice. In certain instances, the Company also repurchases inventory from dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations. Although laws vary from state to state, some states have laws in place that require manufacturers of RVs or boats to repurchase current inventory if a dealership exits the business. The Company's total contingent liability on all repurchase agreements was approximately $798.9 million and $874.9 million at August 29, 2020 and August 31, 2019, respectively.
Repurchased sales are not recorded as a revenue transaction, but the net difference between the original repurchase price and the resale price are recorded against the loss reserve, which is a deduction from gross revenue. The Company's loss reserve for repurchase commitments contains uncertainties because the calculation requires management to make assumptions and apply judgment regarding a number of factors. The Company's risk of loss related to these repurchase commitments is significantly reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders. The aggregate contingent liability related to the Company's repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on these repurchase agreements and the Company's historical loss experience, an associated loss reserve is established which is included in accrued expenses-other on the consolidated balance sheets. The Company's repurchase accrual was $1.0 million and $0.9 million as of August 29, 2020 and August 31, 2019, respectively. Repurchase risk is affected by the credit worthiness of the Company's dealer network and it is not believed that there is a reasonable likelihood there will be a material change in the estimates or assumptions used to establish the loss reserve for repurchase commitments.
A summary of the activity for the fiscal years stated for repurchased units is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2020
|
|
2019
|
|
2018
|
Inventory repurchased:
|
|
|
|
|
|
Units
|
107
|
|
|
125
|
|
|
56
|
|
Dollars
|
$
|
2,592
|
|
|
$
|
5,535
|
|
|
$
|
1,716
|
|
Inventory resold:
|
|
|
|
|
|
Units
|
118
|
|
|
109
|
|
|
56
|
|
Cash collected
|
$
|
2,540
|
|
|
$
|
4,634
|
|
|
$
|
1,585
|
|
Loss recognized
|
$
|
252
|
|
|
$
|
556
|
|
|
$
|
132
|
|
Units in ending inventory
|
5
|
|
|
16
|
|
|
—
|
|
Litigation
The Company is involved in various legal proceedings which are ordinary and routine litigation incidental to the business, some of which are covered in whole or in part by insurance. While the Company believes the ultimate disposition of litigation will not have a material adverse effect on the Company's financial position, results of operations or liquidity, there exists the possibility that such litigation may have an impact on results for a particular reporting period in which litigation effects become probable and reasonably estimable. Though the Company does not believe there is a reasonable likelihood that there will be a material change related to these matters, litigation is subject to inherent uncertainties and management’s view of these matters may change in the future.
Note 13: Revenue Recognition
The following table disaggregates revenue by reportable segment and product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
|
Net Revenues
|
|
|
|
|
|
Towable:
|
|
|
|
|
|
Fifth Wheel
|
$
|
690,452
|
|
|
$
|
688,932
|
|
|
|
Travel Trailer
|
519,282
|
|
|
489,956
|
|
|
|
Other(1)
|
17,833
|
|
|
18,439
|
|
|
|
Total Towable
|
1,227,567
|
|
|
1,197,327
|
|
|
|
Motorhome:
|
|
|
|
|
|
Class A
|
479,120
|
|
|
178,750
|
|
|
|
Class B
|
332,961
|
|
|
255,000
|
|
|
|
Class C
|
211,468
|
|
|
246,417
|
|
|
|
Other(1)
|
33,245
|
|
|
26,760
|
|
|
|
Total Motorhome
|
1,056,794
|
|
|
706,927
|
|
|
|
Corporate / All Other:
|
|
|
|
|
|
Other(2)
|
71,172
|
|
|
81,420
|
|
|
|
Total Corporate / All Other
|
71,172
|
|
|
81,420
|
|
|
|
Consolidated
|
$
|
2,355,533
|
|
|
$
|
1,985,674
|
|
|
|
(1) Relates to parts, accessories, and services.
(2) Relates to marine and specialty vehicle units, parts, accessories, and services.
The Company generates all operating revenue from contracts with customers. The Company's primary source of revenue is generated through the sale of manufactured motorized units, non-motorized towable units, and marine units to the Company's independent dealer network (customers). The Company also generates income through the sale of certain parts and services, acting as the principal in these arrangements. The revenue standard requirements are applied to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for those goods or services. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods or services. The Company's transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. The Company made an accounting policy election to exclude from revenue sales and usage-based taxes collected.
Unit revenue
Unit revenue is recognized at a point-in-time when control passes, which generally occurs when the unit is shipped to or picked-up from the Company's manufacturing facilities by the customer. The Company's payment terms are typically before or on delivery, and do not include a significant financing component. The amount of consideration received and recorded to revenue varies with changes in marketing incentives and offers to customers. These marketing incentives and offers to customers are considered variable consideration. The Company adjusts the estimate of revenue at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed.
The Company's contracts include some incidental items that are immaterial in the context of the contract. The Company has made an accounting policy election to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. The Company has made an accounting policy election to account for any shipping and handling costs that occur after the transfer of control as a fulfillment cost that is accrued when control is transferred. Warranty obligations associated with the sale of a unit are assurance-type warranties that are a guarantee of the unit’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Contract costs incurred related to the sale of manufactured units are expensed at the point-in-time when the related revenue is recognized.
The Company does not have material contract assets or liabilities. The Company establishes allowances for uncollectible receivables based on historical collection trends and write-off history.
Concentration of Risk
None of the Company's dealer organizations accounted for more than 10% of Net revenues for Fiscal 2020, 2019, and 2018.
Note 14: Stock-Based Compensation Plans
On December 11, 2018, our shareholders approved the Winnebago Industries, Inc. 2019 Omnibus Incentive Plan ("2019 Plan") as detailed in the Proxy Statement for the 2018 Annual Meeting of Shareholders. The 2019 Plan allows the Company to grant or issue non-qualified stock options, incentive stock options, share awards, and other equity compensation to key employees and to non-employee directors. The 2019 Plan replaces the 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "2014 Plan"). The number of shares of the Company's Common Stock that may be the subject of awards and issued under the 2019 Plan is 4.1 million, plus the shares subject to any awards outstanding under the 2014 Plan and the predecessor plan, the 2004 Incentive Compensation Plan (the “2004 Plan”), on December 11, 2018 that subsequently expire, are forfeited or canceled, or are settled for cash. Until such time, however, awards under the 2014 Plan and the 2004 Plan, respectively, that were outstanding on December 11, 2018 will continue to be subject to the terms of the 2014 Plan or 2004 Plan, as applicable. Shares remaining available for future awards under the 2014 Plan were not carried over into the 2019 Plan.
The Company's outstanding options have a 10-year term. Options issued to employees generally vest over a three-year period in equal annual installments on the annual anniversary dates following the grant date. Share awards generally vest based either upon continued employment ("time-based") or upon attainment of specified goals. Outstanding share awards that are not time-based vest at the end of a three-year incentive period based upon the achievement of company performance goals ("performance-based"). Generally, time-based share awards vest over a three-year period in equal annual installments on the annual anniversary dates following the grant date. Time-based share awards to directors vest one year from the grant date.
Beginning with the Company's annual grant of restricted stock units in October 2018, dividend equivalents are attached to restricted stock units equal to dividends payable on the same number of shares of the Company's common stock during the applicable period. Dividend equivalents, settled in cash, accrue on restricted stock unit awards during the vesting period. No dividend equivalents are paid on any restricted stock units that are forfeited prior to the vesting date.
The Company's Employee Stock Purchase Plan ("ESPP") permits employees to purchase Winnebago Industries common stock at a 15% discount from the market price at the end of semi-annual purchase periods and is compensatory. Employees are required to hold the common stock purchased for one-year. In Fiscal 2020 and 2019, 21,094 shares and 30,956 shares, respectively, were purchased through the ESPP. Plan participants had accumulated $0.3 million and $0.2 million as of August 29, 2020 and August 31, 2019, respectively, to purchase the Company's common stock pursuant to this plan.
Compensation expense associated with share-based awards is recognized on a straight-line basis over the required service period and forfeitures are recorded when they occur. Total stock-based compensation expense for the past three fiscal years consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Share awards:
|
|
|
|
|
|
Time-based
|
$
|
4,287
|
|
|
$
|
4,986
|
|
|
$
|
4,152
|
|
Performance-based
|
796
|
|
|
716
|
|
|
2,525
|
|
Stock options
|
990
|
|
|
925
|
|
|
502
|
|
Other(1)
|
402
|
|
|
431
|
|
|
255
|
|
Total stock-based compensation expense
|
$
|
6,475
|
|
|
$
|
7,058
|
|
|
$
|
7,434
|
|
(1) Includes stock-based compensation expense related to Board of Directors stock award expense and ESPP expense. Directors may elect to defer all or part of their annual retainer into a deferred compensation plan. The plan allows them to defer into either money units or stock units.
Share Awards - Time-Based
The fair value of time-based share awards is determined based on the closing market price of the Company's stock on the date of grant. A summary of the status of nonvested time-based share awards at August 29, 2020, and changes during Fiscal 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value
|
Outstanding at August 31, 2019
|
215,506
|
|
|
$
|
33.40
|
|
Granted
|
166,440
|
|
|
$
|
42.76
|
|
Vested
|
(77,550)
|
|
|
$
|
34.45
|
|
Forfeited/canceled
|
(2,132)
|
|
|
$
|
36.08
|
|
Outstanding at August 29, 2020
|
302,264
|
|
|
$
|
38.27
|
|
As of August 29, 2020, there was $5.0 million of unrecognized compensation expense related to nonvested time-based share awards that are expected to be recognized over a weighted average period of 0.8 years. The total fair value of awards vested during Fiscal 2020, 2019, and 2018 was $3.3 million, $6.6 million, and $7.1 million, respectively.
On October 13, 2020, the Board of Directors granted 69,538 restricted stock units under the 2019 Plan valued at $3.8 million to the Company's key management group. The value of the restricted stock units, which is based on the closing price of Winnebago Industries common stock on the date of grant, was $54.49. Estimated non-cash stock compensation expense based on this grant is expected to be approximately $1.8 million for Fiscal 2021.
Share Awards - Performance-Based
The fair value of performance-based share awards is determined based on the closing market price of the Company's stock on the date of grant. A summary of the status of the Company's nonvested performance-based share awards at August 29, 2020, and changes during Fiscal 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value
|
Outstanding at August 31, 2019
|
207,433
|
|
|
$
|
33.87
|
|
Granted
|
64,914
|
|
|
$
|
47.93
|
|
Vested
|
(65,302)
|
|
|
$
|
28.21
|
|
Forfeited/canceled
|
(18,053)
|
|
|
$
|
32.79
|
|
Outstanding at August 29, 2020
|
188,992
|
|
|
$
|
40.73
|
|
As of August 29, 2020, there was $2.9 million of unrecognized compensation expense related to nonvested performance-based share awards that are expected to be recognized over a weighted average period of 0.9 years. The total fair value of performance-based share awards vested during Fiscal 2020 was $2.4 million. No performance-based share awards vested during Fiscal 2019 or 2018.
Stock Options
A summary of stock option activity for Fiscal 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding at August 31, 2019
|
253,145
|
|
|
$
|
34.43
|
|
|
|
|
|
Granted
|
55,036
|
|
|
$
|
47.93
|
|
|
|
|
|
Exercised
|
(9,718)
|
|
|
$
|
34.21
|
|
|
|
|
|
Forfeited/canceled
|
(6,019)
|
|
|
$
|
35.09
|
|
|
|
|
|
Outstanding at August 29, 2020
|
292,444
|
|
|
$
|
36.96
|
|
|
7.7
|
|
$
|
6,273
|
|
Vested and expected to vest at August 29, 2020
|
292,444
|
|
|
$
|
36.96
|
|
|
7.7
|
|
$
|
6,273
|
|
Exercisable at August 29, 2020
|
142,754
|
|
|
$
|
34.20
|
|
|
6.9
|
|
$
|
3,455
|
|
As of August 29, 2020, there was $1.3 million of unrecognized compensation expense related to option awards that is expected to be recognized over a weighted average period of 0.8 years.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions(1)
|
2020
|
|
2019
|
|
2018
|
Expected dividend yield
|
0.9
|
%
|
|
1.3
|
%
|
|
0.9
|
%
|
Risk-free interest rate(2)
|
1.7
|
%
|
|
3.0
|
%
|
|
2.0
|
%
|
Expected life of stock options (in years)(3)
|
5
|
|
5
|
|
5
|
Expected stock price volatility(4)
|
41.2
|
%
|
|
39.1
|
%
|
|
38.1
|
%
|
Weighted average fair value of options granted
|
$
|
17.18
|
|
|
$
|
11.09
|
|
|
$
|
14.78
|
|
(1) Forfeitures are recorded when they occur.
(2) Based on U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
(3) Estimated based on historical experience.
(4) Based on historical experience over a term consistent with the expected life of the stock options.
Note 15: Restructuring
During the third quarter of Fiscal 2020, the Company completed a reduction in force intended to improve operational efficiencies and to align with the Company's long-term strategic plan, which has resulted in headcount reductions in the Motorhome segment. As a result, the Company recognized $1.5 million of restructuring charges during the latter half of Fiscal 2020. These charges include termination benefits.
On February 4, 2019, the Company announced the intent to move the Motorhome diesel production from Junction City, OR to Forest City, IA to enable more effective product development and improve cost structure. The associated charges include termination benefits, asset-related expenses, facility closure costs, headcount reductions, and other related costs. Employee-related costs were primarily paid in Fiscal 2019.
The following table details the aggregate restructuring charges incurred:
|
|
|
|
|
|
|
|
|
|
Motorhome
|
|
(in thousands)
|
2020
|
2019
|
Cost of goods sold
|
$
|
1,650
|
|
$
|
1,724
|
|
Selling, general, and administrative expenses
|
47
|
|
219
|
|
Restructuring expense
|
$
|
1,697
|
|
$
|
1,943
|
|
Expenses in the current Fiscal year mainly include headcount reductions and adjustments for facility closure costs. The Company expects approximately $0.4 million of additional restructuring costs related to the facility closure. These costs could be higher or lower in the event the Company makes additional decisions in future periods that impact reorganization efforts.
Note 16: Income Taxes
Income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
Federal
|
$
|
14,318
|
|
|
$
|
16,433
|
|
|
$
|
28,874
|
|
State
|
2,806
|
|
|
3,138
|
|
|
5,215
|
|
Total
|
17,124
|
|
|
19,571
|
|
|
34,089
|
|
Deferred
|
|
|
|
|
|
Federal
|
(790)
|
|
|
6,395
|
|
|
5,123
|
|
State
|
(500)
|
|
|
1,145
|
|
|
1,071
|
|
Total
|
(1,290)
|
|
|
7,540
|
|
|
6,194
|
|
Provision for income taxes
|
$
|
15,834
|
|
|
$
|
27,111
|
|
|
$
|
40,283
|
|
The following table provides a reconciliation of the U.S. statutory income tax rate to the Company's effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
U.S. federal statutory rate(1)
|
21.0
|
%
|
|
21.0
|
%
|
|
25.9
|
%
|
State taxes, net of federal benefit
|
1.9
|
%
|
|
2.9
|
%
|
|
3.0
|
%
|
Impact from Tax Act
|
—
|
%
|
|
—
|
%
|
|
2.6
|
%
|
Domestic production activities deduction
|
—
|
%
|
|
—
|
%
|
|
(2.2)
|
%
|
Income tax credits
|
(2.5)
|
%
|
|
(4.5)
|
%
|
|
(0.5)
|
%
|
Nondeductible compensation
|
0.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Tax-free and dividend income
|
(0.6)
|
%
|
|
(0.5)
|
%
|
|
(0.4)
|
%
|
Uncertain tax position settlements and adjustments
|
0.1
|
%
|
|
0.9
|
%
|
|
0.1
|
%
|
Other items
|
(0.3)
|
%
|
|
(0.3)
|
%
|
|
(0.3)
|
%
|
Effective tax provision rate
|
20.5
|
%
|
|
19.5
|
%
|
|
28.2
|
%
|
(1) The U.S. federal statutory rate for Fiscal 2018 is a blended rate, which includes the impact of the Tax Cuts and Jobs Act (the "Tax Act") enactment.
The Company's effective tax rate increased to 20.5% for Fiscal 2020 from 19.5% for Fiscal 2019 due primarily to the favorable impact in the prior year of research and development credits partially offset by the reduction in annual pre-tax income in Fiscal 2020.
The tax effects of temporary differences that give rise to deferred income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
August 29, 2020
|
|
August 31, 2019
|
Warranty reserves
|
$
|
13,969
|
|
|
$
|
10,949
|
|
Deferred compensation
|
5,406
|
|
|
3,989
|
|
Self-insurance reserve
|
3,426
|
|
|
2,617
|
|
Stock-based compensation
|
2,865
|
|
|
2,558
|
|
Accrued vacation
|
1,681
|
|
|
1,227
|
|
Unrecognized tax benefit
|
498
|
|
|
444
|
|
Inventory
|
717
|
|
|
—
|
|
Leases
|
8,638
|
|
|
—
|
|
Other(1)
|
3,295
|
|
|
3,337
|
|
Total deferred tax assets
|
40,495
|
|
|
25,121
|
|
Convertible notes
|
3,125
|
|
|
—
|
|
Intangibles
|
32,933
|
|
|
28,055
|
|
Depreciation
|
11,715
|
|
|
8,192
|
|
Inventory
|
—
|
|
|
906
|
|
Leases
|
8,330
|
|
|
—
|
|
Total deferred tax liabilities
|
56,103
|
|
|
37,153
|
|
Total deferred income tax liabilities, net
|
$
|
15,608
|
|
|
$
|
12,032
|
|
(1) At August 29, 2020, other includes $0.5 million related to state net operating losses. At August 31, 2019, other includes $0.6 million and $0.4 million related to federal and state net operating losses, respectively. These net operating losses are subject to various expiration periods from 5 years to no expiration. We have evaluated all the positive and negative evidence and consider it more likely than not that these carryforwards can be realized before expiration.
Changes in the unrecognized tax benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
2,822
|
|
|
$
|
1,220
|
|
|
$
|
1,195
|
|
Gross increases-tax positions in a prior year
|
2,486
|
|
|
1,173
|
|
|
25
|
|
Gross increases-current year tax positions
|
522
|
|
|
429
|
|
|
—
|
|
Balance at end of year
|
5,830
|
|
|
2,822
|
|
|
1,220
|
|
Accrued interest and penalties
|
681
|
|
|
769
|
|
|
525
|
|
Total unrecognized tax benefits
|
$
|
6,511
|
|
|
$
|
3,591
|
|
|
$
|
1,745
|
|
The amount of unrecognized tax benefits is not expected to change materially within the next 12 months. If the remaining uncertain tax positions are ultimately resolved favorably, $2.9 million of unrecognized tax benefits would have a favorable impact on the Company's effective tax rate. It is the Company's policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense.
The Company files a U.S. Federal tax return, as well as returns in various international and state jurisdictions. Although certain years are no longer subject to examination by the Internal Revenue Service ("IRS") and various state taxing authorities, net operating loss carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities. As of August 29, 2020, the Company's federal returns from Fiscal 2017 to present are subject to review by the IRS. With limited exception, state returns from Fiscal 2016 to present continue to be subject to review by state taxing jurisdictions. Several years may lapse before an uncertain tax position is audited and finally resolved and it is difficult to predict the outcome of such audits.
Note 17: Income per Share
The following table reflects the calculation of basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
2020
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
Net income
|
$
|
61,442
|
|
|
$
|
111,798
|
|
|
$
|
102,357
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Weighted average common shares outstanding
|
33,236
|
|
|
31,536
|
|
|
31,596
|
|
Dilutive impact of stock compensation awards
|
218
|
|
|
185
|
|
|
218
|
|
Weighted average common shares outstanding, assuming dilution
|
33,454
|
|
|
31,721
|
|
|
31,814
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from Weighted average common shares outstanding, assuming dilution
|
39
|
|
|
189
|
|
|
62
|
|
|
|
|
|
|
|
Basic income per common share
|
$
|
1.85
|
|
|
$
|
3.55
|
|
|
$
|
3.24
|
|
Diluted income per common share
|
$
|
1.84
|
|
|
$
|
3.52
|
|
|
$
|
3.22
|
|
Anti-dilutive securities were not included in the computation of diluted income per share as they are considered anti-dilutive under the treasury stock method.
Note 18: Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income ("AOCI") by component, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
(in thousands)
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
Balance at beginning of year
|
$
|
(559)
|
|
|
$
|
68
|
|
|
$
|
(491)
|
|
|
$
|
(591)
|
|
|
$
|
1,483
|
|
|
$
|
892
|
|
OCI before reclassifications
|
—
|
|
|
(500)
|
|
|
(500)
|
|
|
—
|
|
|
(1,415)
|
|
|
(1,415)
|
|
Amounts reclassified from AOCI
|
33
|
|
|
432
|
|
|
465
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Net current-year OCI
|
33
|
|
|
(68)
|
|
|
(35)
|
|
|
32
|
|
|
(1,415)
|
|
|
(1,383)
|
|
Balance at end of year
|
$
|
(526)
|
|
|
$
|
—
|
|
|
$
|
(526)
|
|
|
$
|
(559)
|
|
|
$
|
68
|
|
|
$
|
(491)
|
|
Reclassifications out of AOCI, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Location on Consolidated Statements of Income and Comprehensive Income
|
2020
|
|
2019
|
|
2018
|
Amortization of net actuarial loss
|
SG&A
|
$
|
33
|
|
|
$
|
32
|
|
|
$
|
27
|
|
Interest rate contract
|
Interest expense
|
432
|
|
|
—
|
|
|
—
|
|
Total reclassifications
|
|
$
|
465
|
|
|
$
|
32
|
|
|
$
|
27
|
|
Note 19: Interim Financial Information (Unaudited)
The following tables show selected operating results for each 3-month quarter of Fiscal 2020 and 2019 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
Quarter Ended
|
|
|
|
|
|
|
(In thousands, except per share data)
|
November 30,
2019
|
|
February 29,
2020
|
|
May 30,
2020
|
|
August 29,
2020
|
Net revenues
|
$
|
588,458
|
|
|
$
|
626,810
|
|
|
$
|
402,458
|
|
|
$
|
737,807
|
|
Gross profit
|
78,613
|
|
|
79,782
|
|
|
32,024
|
|
|
122,509
|
|
Operating income
|
23,894
|
|
|
29,644
|
|
|
(8,173)
|
|
|
68,398
|
|
Net income
|
14,068
|
|
|
17,268
|
|
|
(12,353)
|
|
|
42,459
|
|
Net income per share (basic)
|
0.44
|
|
|
0.51
|
|
|
(0.37)
|
|
|
1.26
|
|
Net income per share (diluted)
|
0.44
|
|
|
0.51
|
|
|
(0.37)
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
Quarter Ended
|
|
|
|
|
|
|
(In thousands, except per share data)
|
November 24,
2018
|
|
February 23,
2019
|
|
May 25,
2019
|
|
August 31, 2019(1)
|
Net revenues
|
$
|
493,648
|
|
|
$
|
432,690
|
|
|
$
|
528,940
|
|
|
$
|
530,396
|
|
Gross profit
|
70,996
|
|
|
66,429
|
|
|
86,584
|
|
|
83,188
|
|
Operating income
|
32,625
|
|
|
28,903
|
|
|
48,974
|
|
|
44,765
|
|
Net income
|
22,161
|
|
|
21,598
|
|
|
36,171
|
|
|
31,868
|
|
Net income per share (basic)
|
0.70
|
|
|
0.68
|
|
|
1.15
|
|
|
1.01
|
|
Net income per share (diluted)
|
0.70
|
|
|
0.68
|
|
|
1.14
|
|
|
1.01
|
|
(1) During the quarter ended August 31, 2019, the Company recorded a $10.8 million reduction of WIP inventory and increase to Cost of goods sold for the cumulative correction of an immaterial error related to prior periods. The error was not material to the Consolidated Financial Statements for any quarterly or annual period.